Posted by Dan Phelan on Wed, Mar 02, 2011 @ 07:26 AM
Most business owners know that independent contractors are less expensive to employ than employees. Yet many companies pay independent contractors to do the exact same job, for the same number of hours as their regular employees. The advantages to using independent contractors is that they typically cost less, have lower wages, payroll isn't contemplated for workers' compensation, no social security taxes, and state/federal taxes are not withheld. Going this route, gives the contractor utilizing independent contractors a major advantage at bidding work because their base costs and overhead are substantially lower than a contractor that is playing by the rules. The other loser in this scenario, is everyone that pays taxes. Law abiding taxpayers are shouldering the load of income taxes and unemployment compensation taxes that unsavory contractors are passing on to them by intentionally misclassifying workers to save money. The other potential loser is a 1099 contractor that is injured on the job and doesn't receive workers' compensation because they weren't an employee.
As you may have heard, the State of Connecticut is trying to close a hefty budget deficit. One of the myriad solutions that has been offered is for the Department of Labor to step up enforcement on construction sites. If you're the general contractor on a job, and one of your subs is improperly classifying their workers as independent contractors, the job can be shut down on the spot and the DoL can fine the owner of the job several hundred dollars a day; retroactive to every day the site was operating with misclassified workers.
Unfortunately for general contractors and job owners, when you get a certificate of insurance you can only see what lines of coverage are in force at the time the certificate was issued, and what limits are contained therein. There is no way to tell how your subs' workers are being paid, or whether they are legitimately covered by workers' comp. If one of your subs bids a job at a significantly lower cost than everyone else, that's your red flag that something is amiss. Or they're just really bad at estimating.
The other potential way for a General Contractor to know whether their sub is misclassifying, is if on their certificate of insurance, the company is listed as a sole-proprietor. As a sole-proprietor, the sole employee is not legally mandated to carry workers' compensation. Until they have someone helping them on the job site. Even for a day. So now, it's your job or your foreman's job to make sure that this sole proprietor is performing 100% of the work in their contract by themselves, with no outside helpers. If the Department of Labor shows up on your site, and finds a sole proprietor and his helper performing work is a perfect example of why a site could be shut down. It could have looked more cost effective during the bidding process, but the fines and work stoppage will be significantly more costly to the GC and the owner than hiring a contractor on the up and up would have been.
To learn more, check out this exciting 108 page report from the Department of the Treasury and the IRS
More reading on Misclassification law enforcement that is Connecticut Specific